What is Accounting Procedure?
The accounting procedure is defined as the process of standardized nature that performs a specific accounting function designed to incorporate better risk management policies so that these functions are completed more productively and efficiently. The accounting department performs several functions, such as billings for their customers, providing invoices to suppliers, and performing bank reconciliation; hence such tasks normally require comprehensive and streamlined procedures.
Table of contents
Characteristics of Accounting Procedure
#1 – Collection of Financial Information
It begins with the collection of financial documents. The information collected may be logged and maintained through physical or electrical modes. The cash register tapes, incoming bills, receipts, records of salaries, travel receipts, forms, and invoices are examples of financial documents.
#2 – Account Reconciliation and Verification
Once logged into the system, the accountants verify the financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc. with the available evidence. Account reconciliationReconciliationReconciliation is the process of comparing account balances to identify any financial inconsistencies, discrepancies, omissions, or even fraud. At the end of any accounting period, reconciliation involves matching balances and ensuring that debits (credits) from one account for one transaction is same as the credit (debits) to another account for the same transaction. and internal and external reporting are performed as per the established accounting procedures. These procedures should be designed and constructed so that it records valid, objective, and accurate information. In addition, the procedures should be consistent and comparable.
Examples of Accounting Procedures
The best example to describe the above point is that of inventory valuationInventory Valuation Inventory Valuation Methods refers to the methodology (LIFO, FIFO, or a weighted average) used to value the company's inventories, which has an impact on the cost of goods sold as well as ending inventory, and thus has a financial impact on the company's bottom-line numbers and cash flow situation.. Once it is determined that inventories are to be recorded and valued using the First-in first-out inventory methodFirst-in First-out Inventory MethodUnder the FIFO method of accounting inventory valuation, the goods that are purchased first are the first to be removed from the inventory account. As a result, leftover inventory at books is valued at the most recent price paid for the most recent stock of inventory. As a result, the inventory asset on the balance sheet is recorded at the most recent cost., it should not be changed to any alternative valuation method such as that to either the LIFO inventory methodLIFO Inventory MethodLIFO (Last In First Out) is one accounting method for inventory valuation on the balance sheet. LIFO accounting means inventory acquired at last would be used up or sold first. or weighted average method.
Another example could be billing procedures wherein invoices are generally issued to the customers. This involves three broad tasks: information collection for invoices, creating invoices, and issuing them back to the customers. For example, the people responsible for the billing process may review daily billing information and verify prices to process the order. Once the review activity is complete, it may ask the system to print the invoices in a batch and wherein such printed invoices are then sent over to the billing address.
The determination of payrollPayrollPayroll refers to the overall compensation payable by any organization to its employees on a certain date for a specific period of services they have provided in the entity. This total net pay comprises salary, wages, bonus, commission, deduction, perquisites, and other benefits. for the employees is another example. The payroll executive may collect the following information, such as timesheets wherein they may review and approve the timesheets to record the hours spent by the employees working towards the said task. For the tasks worked, the corresponding wage rate is applied, and this, in turn, is utilized to determine gross pay and the net payNet PayEmployees' net pay, often known as take-home pay, is their salary after all deductions. after tax deductions.
Calculation of depreciationCalculation Of DepreciationThe Depreciation Expense Formula computes how much of the asset's value can be deducted as an expense on the income statement. Formula for Straight-line depreciation method= Cost of an asset - Residual value/useful life of an asset. for fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples. is another example. Basis the reporting requirements on taxes or for accounting purposes, adoption of the MACRS depreciationMACRS DepreciationMACRS (Modified Accelerated Cost Recovery System) is a tax-related depreciation system used in the United States that allows for a higher depreciation deduction in the early years and a lesser depreciation deduction in the later years. or straight-line depreciation methodStraight-line Depreciation MethodStraight Line Depreciation Method is one of the most popular methods of depreciation where the asset uniformly depreciates over its useful life and the cost of the asset is evenly spread over its useful and functional life. can be looked upon to determine the asset’s depreciation expense.
- IT helps in the process of decision making as it provides a framework and also an effective division of work between accounting departmentsAccounting DepartmentsThe accounting department looks after preparing financial statements, maintaining a general ledger, paying bills, preparing customer bills, payroll, and more. In other words, they are responsible for managing the overall economic front of the business..
- Different accounting procedures require different levels of specialization and skills to record the information into the accounting systems.
- It helps in recording of information of financial nature and non-financial nature.
- It ensures that the recorded information can be cross-verified. It helps makes financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. of uniform in nature and which could be utilized for industry analysisIndustry AnalysisIndustry analysis refers to the analysis of industry’s environment that guides the industry to grow and survive in a competitive environment and gain a competitive edge in the industry as it predicts the future and changes in the market and analyze the threats and opportunities in the way ahead and making decisions and planning according to it..
- Applying the right accounting procedures ensures efficiency and time-saving in recording information into the system.
- It ensures that the business records are maintained in chronological order.
- It ensures that the business complies with all legal and regulatory compliance.
- The accounts maintained and formed as per accounting procedures can be easily manipulated if the processes are not revised as per the present applicable guidelines prescribed as per the accounting standards and legal compliance.
- The information shared and prepared through adopted procedures may be biased due to human errors and judgments.
- Non-compliance with accounting principlesAccounting PrinciplesAccounting principles are the set guidelines and rules issued by accounting standards like GAAP and IFRS for the companies to follow while recording and presenting the financial information in the books of accounts. in the procedures may result in incorrect information recording.
- It helps in the division of work among different departments. Still, it also creates unnecessary silos, which in turn produces difficulty in the reconciliation process of the financial information.
The accounting procedures are a set of tasks or processes that helps the accounting department to streamline and perform useful accounting functions. This ensures better information management with increased transparency and robust reporting of facts. Correct and to the point procedures of accounting help in the preparation of useful and accurate financial statements.
This has been a guide to what accounting procedure is. Here we discuss characteristics and examples of accounting procedures with advantages and disadvantages. You may learn more about accounting from the following articles –